The Ambit Capital report noted that the current retail credit-funded consumption binge is likely to experience a ‘hard stop’. Photo: Ramesh Pathania/Mint

Mumbai: The ongoing consumption demand that began in fiscal 2012 is unsustainable given the poor employment growth as private sector investments still remain a far cry, and this growth story may get hard to stop sooner rather than later, warned a brokerage in a report.

According to Ambit Capital, despite the slowdown in income and employment growth between FY12 and FY17, private consumption continued to grow at a rapid pace, especially in categories like FMCG and passenger vehicles “showing resilience”.

As per the brokerage, the rise of consumption growth over FY12 to FY17 has been driven by higher retail credit. “As corporate credit demand waned over 2011-12 to 2016-17, both NBFCs (non-banking financial companies) and banks pushed retail credit aggressively. The retail credit-GDP ratio rose from 13% to 16% in 2016-17,” Ambit said.

However, it noted the “current bout of consumption growth appears unsustainable mainly because consumption boom has uniquely been accompanied by a contraction in the investment-GDP ratio” to 7% during FY12 to FY17, while the ratio for consumption-GDP is 3%.

“Cross-country evidence suggests that only consumption booms that are accompanied by an increase in investments tend to be sustainable as this is a tangible proof of jobs being created and/or efficiency improving,” it said where the averages of these have been 4% each.

The report also noted that the current retail credit-funded consumption binge is likely to experience a “hard stop” sooner than later on basis of various trends, including a plunge in consumer confidence to a four-year low during the first quarter of the current fiscal. Besides, households’ savings ratio at an 18-year low and retail NPA (non-performing asset) problems have begun to emerge particularly in the housing finance segment, are also factors which could effect retail credit-funded consumption, Ambit said.